Good morning. My name is Misty, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2016 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then 1 on your cell phone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Adam Auvil, you may begin your conference.
Good morning. Thank you for joining us on CNO Financial Group's third quarter 2016 earnings conference call. Today's presentation will include remarks from Ed Bonach, Chief Executive Officer, Gary Bhojwani, President, and Erik Helding, Chief Financial Officer. Following the presentation, we will also have several other business leaders available for the question and answer period. During this conference call, we will be referring to information contained in yesterday's press release. You can obtain the release by visiting the media section of our website at www.cnoinc.com. This morning's presentation is also available in the investors section of our website and was filed in a Form 8-K earlier today. We expect to file our Form 10-Q and post it on our website on November 7th.
Let me remind you that any forward-looking statements we make today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today's presentation contains a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You will find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix. Throughout this presentation, we will be making performance comparisons, and unless otherwise specified, any comparisons made will be referring to changes between third quarter 2015 and third quarter 2016. With that, I will turn the call over to Ed.
Thanks, Adam. Good morning, everyone. CNO's business performance remains strong, as highlighted by our ability to expand our customer reach while maintaining pricing discipline. First-year collected premiums were up 7% on strong annuity sales, and total collected premiums were up 2%. New annualized premium, or NAP, was down 4% as we continue to see a shift toward annuity products and from the effects of the political campaign on direct marketing costs. Policies in force and annuity account values were both up for a seventh straight quarter, showing growth in the enterprises not only through sales but also retaining satisfied customers. Operating earnings per share, excluding significant items, were $0.35, up 6% as margins across the businesses were largely in line with expectations. We returned $66 million to shareholders in the quarter, $52 million from common stock repurchases, and we paid $14 million in dividends.
Lastly, as previously announced, we recaptured a closed block of long-term care business. Let's turn to slide six for a brief update on the status of the recapture. The process is proceeding as expected, and the assets and liabilities have been successfully recaptured. We have returned policyholder administration back to CNO control. It is important to note that policyholder administration has continued without disruption, and our insurance companies are meeting policyholder obligations. The independent asset audit is progressing, and we intend to conclude it by the end of the year, with results reported in conjunction with our fourth quarter earnings. We have maintained ongoing communication and continued alignment with regulators. Erik will go into greater details regarding the recapture later in the presentation. I'll now turn the call over to Gary to discuss our segment results. Gary?
Thanks, Ed. Turning to slide seven in our segment results. Bankers Life first-year collected premiums were up 8% in the quarter, driven by strong annuity sales, which grew 13%. Strong growth in annuity sales is a trend we continue to experience as more middle American consumers in or near retirement are finding value in financial products with guaranteed income and principal protection. Annuity count values on which spread income is earned increased 2% to $7.7 billion. Total policies in force increased 1%, including an 8% increase in the number of third-party policies in force. Bankers Life NAP was down 5%, driven by lower sales of life insurance, Medicare Supplement, and long-term care plans. As a reminder, NAP includes 6% of annuity deposits, 10% of single premium whole life deposits, and 100% of all new other premiums on an annualized basis.
New agent recruiting increased 15% in the quarter as process and technology investments made last year continue to positively impact results. The average number of producing agents was down 5%, driven in part by a decline in inbound leads that are central in helping new agents build their book of business. The coming period, we expect to better optimize lead flow across our sales channels. Third-party issued policies were up 14%, and fee income, primarily derived from the sale of Medicare Advantage plans, was up 11% on a trailing four-quarter basis. Turning to Washington National. First-year collected premiums and NAP were down 6% and 5%, respectively. Total collected premiums were down 1%, with a 2% increase in Supplemental Health offset by the continued runoff of the closed Medicare Supplement block. Worksite NAP was up 12%.
This momentum reflects an increase in PMA worksite agent recruiting and retention and new group acquisition. The ONE SOURCE benefit enrollment and servicing platform was rolled out to the field in preparation for the fourth quarter enrollment season. NAP in the individual market was down 13% as we rebuild agent count and productivity of PMA agents serving small farm and rural communities. Our focus is on strengthening field management talent, recruiting, and improved agent productivity through introduction of a mobile tool currently being piloted to assist agents in acquiring and servicing policyholders. The average producing agent count at PMA was up 7%, benefiting from a 4% increase in recruiting and improved retention. Moving on to slide nine, Colonial Penn's first-year collected premiums were up 5%, reflecting strong sales in recent periods.
Total collected premiums were up 6% due to continued growth both in first-year premiums from new sales and steady persistency in the in-force block. NAP was down 3% for the quarter, largely due to the decision not to pursue higher-cost television advertising in the midst of the 2016 election cycle. However, on a September year-to-date basis, Colonial Penn's NAP is still up 5% versus 2015 due to continued lead source diversification. Moving on to slide 10, our key internal experts and outside vendors have made good progress in understanding the Department of Labor fiduciary standards rule and its effects on our business. We continue to build the material components into our business model, and will meet the April 2017 and January 2018 compliance deadlines.
It is important to understand how the rule will impact our segments, namely that Colonial Penn will not be impacted, and Washington National will be immaterially impacted due to the low volume of products that are subject to the rule. This segment has only sold a handful of annuities during 2016. The bulk of the impact will be in Bankers Life. However, we do not anticipate any material adverse impacts to our business at Bankers Life or our recently launched broker-dealer product portfolios. Bankers Life will be utilizing the BIC exemption. Transaction-based compensation will continue to be paid for covered products, and additional compensation impacts are currently under review. We anticipate implementation expenses to be in the $8 million-$10 million range.
As previously discussed, the diversity of our distribution channels and products and our robust compliance culture have lessened any meaningful disruption to our business model as a result of adopting the rule. I'll now turn it over to Erik to discuss our financial results.
Thanks, Gary. CNO had a strong quarter on the earnings front. Segment results were in line with expectations, and we reported operating earnings per share of $0.37. Excluding significant items, operating earnings per share was $0.35, up from $0.33 in the prior year. Operating return on equity was 9.2% in the quarter. We reported net income per share of $0.11, reflecting a $0.28 loss on the recapture of the closed block long-term care business. Despite the recapture, CNO's capital position remains strong. We reported estimated consolidated risk-based capital of 458%, up 10 points from the second quarter. Consolidated risk-based capital reflects the $110 million statutory loss in the recapture, but was offset by a $200 million capital contribution. Holding company cash and investments totaled $189 million, down from the second quarter due to the previously mentioned capital contribution to the insurance subsidiaries.
Leverage was approximately 20% and unchanged from the second quarter. Book value per diluted share, excluding AOCI, increased to $20.80 from $20.67 at June 30th. We repurchased $52 million of common stock at an average price of $16.80. For the year, we repurchased $203 million of common stock at an average price of $17.37. As previously disclosed, we decided to suspend our share repurchase program for the remainder of 2016. We continue to expect capital generation to remain strong, and this should allow us to rebuild our excess capital position quickly and resume deployment in the first half of 2017. Lastly, I'm pleased to announce that we have reached a settlement with the Internal Revenue Service on certain matters that have been subject to appeal for nearly a decade. The settlement will result in a gain of approximately $120 million in the fourth quarter of 2016.
Of the $120 million gain, approximately $70 million represents additional life NOLs that will be used to offset taxable income in the third and fourth quarter of 2016, as well as the tax liability associated with the recapture of the closed block LTC business. The remaining $50 million represents increases to our non-life NOLs that we expect to utilize over the next several years. Turning to slide 11 and a more in-depth discussion on the recapture of the closed block LTC business. We recorded an after-tax GAAP loss of $53 million, in line with the estimate provided on September 29th. The statutory loss, coupled with the recapture of the liabilities and assets, which had a heavy concentration of NAIC 5s and equities, required a significant cash infusion in order to maintain consolidated RBC in the 450% range.
In the fourth quarter, we will begin reporting the closed block LTC business as a fifth operating segment. We expect operating earnings to be approximately break even to a slight loss on a quarterly basis going forward. In terms of the Level 3 assets, let me make a couple of comments. On September 29th, we disclosed our estimated values for the Level 3 investments, summarized by investments that were part of the initial audit, investments that were part of the expanded audit, and investments that we do not plan to include as part of the audit. With respect to the assets that were included in the initial scope of the audit, our estimated values recognize the inherent volatility and default probability given the nature of the investments and specific ownership-related issues.
The audit related to this group was substantially completed in the third quarter. Based on the information available to us at this time, we feel comfortable that our estimated values are reasonable. In mid-September, we chose to expand the scope of the audit primarily to independently confirm our internal assessment that these securities do not have the same ownership structure concerns and have lower propensity to default than those included in the initial audit. While we continue to work through this phase of the audit, to date, we have not uncovered anything that would lead us to believe that our initial assessment was incorrect. With respect to the assets that we do not intend to include as part of the audit, we have greater confidence in the reasonableness of our valuation inputs.
While these investments may be subject to normal market value fluctuations, concerns related to ownership structure and the probability of default are much lower than the other Level 3 investments. As we work through the process of unwinding these securities, it is important to note the following. First, due to the relative lower quality of some of the assets, cash proceeds that are reinvested in higher-rated securities will result in a release of capital. While it is difficult to estimate how much capital and over what period of time this will happen, it is not unreasonable to assume that this will begin to occur over the next several quarters. Second, because of the amount of capital necessary to back these lower-rated securities, any additional valuation adjustments would have minimal impact to consolidated RBC.
In fact, if we were to fully write down the remaining value of the assets that were included in the initial scope of the audit, our consolidated RBC ratio would be negatively impacted by less than 10 points. In terms of the liabilities, it is worth noting the following. On a GAAP basis, there are $552 million of reserves, $145 million of which are claim reserves. This higher proportion of claim reserve to total reserves is not unusual given the higher average attained age of 83. While $552 million is not an insignificant level of reserves, it is important to note that this represents approximately 2% of CNO's overall reserves. In addition, there are just over 10,000 policies in force, and we expect this number to shrink relatively quickly due to an annualized termination rate of approximately 10%.
There are no intangibles or testing margin in this block, Changes in assumptions are immediately reflected in our financial statements. In conjunction with our normal fourth quarter review, we will update all key assumptions on this block as well. We have provided interest rate-related sensitivities in the past, we thought it appropriate to provide a similar sensitivity on this block. For a 50-basis-point reduction in the ultimate new money rate assumption, we would expect a $15 million pre-tax charge to income. We view this to be very manageable in the context of our overall capital structure and financial position. Turning to slide 13 and our segment earnings. Bankers Life earnings in the quarter reflect higher LTC margins, which were partially offset by lower Medicare Supplement margins. Washington National's earnings reflect lower Supplemental Health margins. Colonial Penn's results were in line with seasonal expectations.
For the full year, we expect to report approximately breakeven earnings for Colonial Penn. Lastly, corporate segment results were flat year-over-year. Turning to slide 14 and our key health benefit ratios. Bankers Life Medicare Supplement benefit ratio was 72.5% in the quarter, in line with expectations and recent trends. For the fourth quarter of 2016, we expect the Medicare Supplement benefit ratio to be in the 70%-73% range. Bankers Life long-term care interest-adjusted benefit ratio was 77.7% on a reported basis and reflects a $6 million impact from policyholder actions following the implementation of rate increases. Excluding these impacts, the interest-adjusted benefit ratio was 82.6%, in line with expectations. We continue to expect the long-term care interest-adjusted benefit ratio, excluding the impact of rate increases, to be in the 81%-86% range in the fourth quarter.
Washington National Supplemental Health interest-adjusted benefit ratio was 59.8%, slightly above the high end of our expectations, but down from the second quarter. We expect the interest-adjusted benefit ratio to be in the 59% range in the fourth quarter, reflecting the higher levels we have experienced over the past couple of quarters. Turning to slide 15 and our investment results. Third quarter new money rate of 5.29% was strong and driven by tactical investments in esoteric ABS, TCP direct loans, and special situation funds. After a difficult first quarter of the year, we made some adjustments to our alternative allocations. Those actions are showing positive results. Asset turnover remains low as we seek to defend portfolio yields in this persistent low-interest-rate environment. Gross realized gains and losses continue to be moderate. Impairments were minimal and limited to two securities.
With that, I'll now turn it back over to Ed.
Thanks, Erik. CNO remains a compelling investment with a growing, diversified business. We remain focused on profitable growth through meeting the needs of the underserved middle-income market in the U.S. CNO's strong free cash flow generation provides the ability to quickly replenish our excess capital position. Although we have no stated target of excess capital, recent events have underscored the value of holding readily deployable capital for use as needs or opportunities arise. With the recapture of the closed block LTC business, it is important to note that we do not expect any material impact to ongoing operations, future cash flows, or earnings. Lastly, we remain focused on the goal to reduce our relative long-term care exposure by 50% over the next three to six years. A portion of that reduction will come from normal run-on and run-off dynamics of the business.
However, reinsurance is a necessary piece to accomplish this objective. Our Bankers Life long-term care block is quite different than most LTC blocks in the industry, and those differences are why we believe that a reinsurance deal is achievable. Slide 19 of the appendix provides the key points of differentiation. It's also important to remember that it has always been our plan to enter a reinsurance agreement on Bankers LTC with a traditional reinsurance partner. With that, we'll now open it up for questions. Operator?
At this time, if you would like to ask a question, press star one on your telephone keypad. That's star, then the number one to ask a question. We'll pause just for a moment to compile the Q&A roster. Your first question is from Randy Binner.
Hey, good morning. I'll pick up right where Ed left off there on the, it seemed like somewhat decent prospects for some risk transfer on long-term care with a traditional reinsurance partner. I guess my thought on this whole BRe situation is that that might have some kind of chilling effect on risk transfer in the LTC area. Is that something that's an active dialogue that you're having with the reinsurance community?
Randy, thanks for your question. This is Ed. We are regularly interacting with reinsurers on a variety of things. We have LTC as one of those topics when we talk to them, yes.
Okay. On the commentary around the buyback, does cash need to build to a certain level? You mentioned sometime in the first half of 2017, you have a little bit of a tailwind, I think maybe $15 million-$20 million a quarter more than we would've thought because of this IRS settlement, there's earnings as they develop. Is there a level of cash buffer you would want to get to before you would recommit to the share purchase program?
Hey, Randy. Thanks for the question. This is Erik. I'd say, in general, no, but in terms of thinking about kind of excess capital deployment, I do like to have a level of excess capital above and beyond what I plan to spend. To the extent we entertain the notion of re-entering the market or think about deploying our excess capital in other ways, I always like to have a little extra dry powder on hand. Our stated minimum is $150 million. It's unlikely that we would manage to $150 million every quarter while we're deploying excess capital. I'd likely manage to something between $200 million and $250 million.
$200 and $250 total, not buffer.
Yeah, that's correct. Yes.
Then what would be the buffer in there, though? You always want to keep it to 150? I think that's been the number historically, right?
150 million is the stated objective minimum at all times. The buffer above that would then be $50-$100 million.
Okay. Just getting back to-
Think of that as being available for opportunistic deployment.
All right. Understood. Thank you.
Your next question is from Humphrey Lee.
Good morning, and thank you for taking my question. A question related to Washington National's underwriting experience. It's been weak since second quarter. Just wondering what are some of the dynamics that you're seeing in the Supplemental Health block, and then also how you're trying to address the underwriting pressure.
Hey, Humphrey. Thanks for the question. This is Erik again. The interest-adjusted benefit ratio has been a little bit elevated the last couple of quarters. If you recall, in the second quarter, we had really a confluence of three things happening. We had slightly higher claims, and then slightly lower persistency in newer policies and slightly higher persistency in older policies. I'd say those trends largely did recur here in the third quarter, although I think the claim portion was a little bit less pronounced than it was in the second quarter. I think the persistency really was the issue in the third quarter. That's not necessarily a bad economic outcome for the business.
Okay. Going forward, because of these dynamics, we should expect the interest-adjusted benefit ratio to be kind of elevated, at least could potentially be on 4Q?
Right now our expectation is that the interest-adjusted benefit ratio will be in the 59% range in the fourth quarter. We obviously haven't given guidance beyond that at this time.
Okay. Then maybe shifting gears to Bankers. The recruiting effort seems to be pretty strong in the quarter. What is driving the increase in agent recruiting?
Humphrey, this is Gary. Thanks for the question. Really, we've taken a number of steps over the last year to implement certain technology and other initiatives and have made the recruiting a focus. We were very pleased with the 15% increase and continue to work towards building that recruitment.
Then maybe just remind us, what is the ramp-up time from recruit to being a productive agent?
Just to make sure I heard the question correctly, the ramp-up time?
Yeah. From the recruitment.
Yeah. It's typically about six months to reach that, what we refer to as a successful new agent status.
Okay. All right. Thank you.
Your next question is from Ryan Krueger.
Hi. Thanks. Good morning. I just wanted to first follow up on the excess capital comment. Just maybe to confirm, your target is $150 million at the holding company, and you're at $189 right now. You're $19 million above the target, and you'd like to be $50 million-$100 million above that target before kind of deploying or going back into the market for buyback. Is that the right understanding?
Hey, Ryan. It's Erik. Yes, $189 million at the end of the third quarter. That's $39 million above our stated corporate minimum objective. Yes, to the extent we entertain excess capital deployment, we're going to want to be in that $200 million-$250 million range.
Got it.
We're not quite there yet, but we're getting pretty close.
You typically generate $75 million of excess capital per quarter. Would that be boosted maybe by $15 million-$20 million in the fourth quarter because of the tax settlement?
That's correct.
Okay. Separately, do you have any, I guess, preliminary commentary on the fourth quarter long-term care review, I guess, as it pertains to claim trends you've seen this year relative to your assumptions as well as interest rate levels?
Sure. I think a couple of comments on that. In terms of experience, whether it's claims or persistency, remember that we conducted some pretty comprehensive studies on both of those in the last couple of years. Our experience in those areas has largely been in line with those studies, if not slightly better. As we kind of move into the fourth quarter here and start thinking about year-end testing, where I sit today, not envisioning any type of material movement in our margin with respect to claims or persistency. That's good news. I think the risk remains related to interest rates. If you recall, we had a rising rate assumption in our 2015 year-end testing. Rates continue to be low. The yield curve's probably a little bit flatter, we're going to have to take a pretty hard look at that.
What does that mean? The best I can do at this particular point in time is point you back to what we've done in the past. In instances in 2013 and 2014 where we've lowered the ultimate new money rate assumption by 50 basis points, that's typically caused a decline in margin of about $50 or $60 million. To the extent we do something like that again here at year-end 2016, I would expect to see the margin impact to be roughly the same. Now take that in the context of $180 million of margin in total for long-term care as of year-end 2015. We have degradation in our margin. It may be offset by slightly better performance in claims and persistency. Net net, though, we don't have a charge in the fourth quarter. That's kind of what I see evolving here.
Very helpful. Thanks a lot, Erik.
Your next question is from Michael Kovac.
Great. Good morning. Just wanted to follow up on the long-term care recapture. I think you mentioned in the comments there that there was some liability sort of review that you're planning on conducting in the fourth quarter and gave us some numbers on interest rates. Can you just remind us what liability adjustments you made when you recaptured it at the end of September versus what you're looking at in the fourth quarter?
Sure, Mike, this is Erik again. When we recaptured the business and updated basically the assumptions to reflect CNO's current assumptions, on the liability side we took a marker of about $60 million. About $50 or $52 million of that was related to bringing the interest rate assumption down to our current assumptions. That was the vast majority of it. Now moving into the fourth quarter, we'll retest all of the assumptions and update all the assumptions. To the extent CNO's current assumptions need to change, the assumption related to the closed block long-term care business will also have to change.
Okay. That's helpful. It was the other liability assumptions, not just interest rates that you adjusted in the third quarter?
Yeah, the other piece was largely related to a rate increase assumption that was embedded in the reserves. I think as you know, it's not our practice to incorporate future rounds of rate increases in our margins or reserves, we took that out as well.
Great. That's helpful. Sort of shifting gears here, as you think about the Department of Labor and the updates coming in April 2017 and your compliance with that, can you give us a sense of what the expenses that you expect to be sort of ongoing versus one-time in nature? You called out $8 million-$10 million. Do you expect that to continue into 2018 and beyond, or are those just costs to become compliant?
Yeah, Mike. Erik again. Thanks again for the question. Expecting 2017 implementation costs to be in the $8 million-$10 million range, as Gary noted. On an ongoing basis beyond that, we think the normal run rate is really around $2 million-$3 million.
Great. That's helpful.
Your next question is from Sean Dargan.
Thanks, and good morning. Erik, a lot of investors seem to have read the civil complaint that Bankers and Washington National filed against the principals of Beechwood. It seems like what some investors are having a hard time getting their heads around is that you are alleging widespread fraud on behalf of Beechwood and the principals in Platinum, and they are just trying to reconcile that around the limited, I guess, Level 3 assets that you are auditing. I guess the question is, why are not you auditing all of the assets associated with Beechwood?
Sean, just to answer pieces and parts of your question. With respect to anything litigation related or proceedings that are ongoing, we are not going to obviously comment on that given where we stand. Hopefully you understand that.
Yeah.
With respect to your second part of the question, why are not we auditing all of the assets? Recall the breakdown of the assets that we disclosed previously. You have got a portion that was cash, which does not need to be audited. You have got a portion of the assets, which are Level 1 and Level 2 securities, which we feel very comfortable with. Then you have the remainder, which is Level 3, which the vast majority of the Level 3 securities are undergoing some form of audit. The portion that is not undergoing audit is being subjected to scrutiny and review. We feel like we have got those covered off pretty well.
Thanks. That is great. Just one thing that caught my attention in that civil complaint was that you said that there were other reinsurers who were interested in the closed block long-term care. Ed discussed the potential outcomes for the Bankers LTC. I am wondering if you think that there is any market for reinsurance for the closed block LTC that you are bringing back.
Sean, this is Ed. Believe there is. The extent to which we would entertain reinsuring any portion of this closed block would have to be evaluated in the grand scheme of LTC reinsurance. Our priority is to look for reinsurance of Bankers Life LTC. As Erik mentioned in his comments, the closed block LTC continues to run off, at least from a policy count standpoint of about 10% a year, largely due to mortality. The cash flows, the claim patterns are quite steady and not as volatile. From the standpoint of where do we want to and need to reduce LTC risk, those factors will be taken into account.
Thanks, Ed.
Your next question is from Erik Bass.
Thank you. I guess for Gary, as we look forward, what needs to happen to get back to positive NAP growth? Is it more related to increasing the producer count, or do you need to see more marketplace demand for life, Medicare Supplement, annuities and other kind of NAP products? I guess how tied are those two things, and is it the market environment that's making it harder to recruit and retain agents?
Okay. Erik, thanks for the question. Maybe a couple of things to respond. I think when you look at the CNO Group overall, I think it's important to remember that we've got a pretty significant diversity of types of businesses here. We've got fee income business, which we were very pleased with the growth in. We have underwriting business, and if you look at our policy count and new collected premiums and total collected premiums continue to show growth. Then we've got deposit types of business such as annuity business, and that of course, has shown very good growth. I think if we look in the aggregate at the numbers we're reporting and the extent to which they represent sales growth, I think there's the building of a good trend.
To continue to maintain that, of course, we need to make sure we're bringing in and retaining agents, and we're continuing to put products into the marketplace that our middle American consumers need. I guess the short answer of responding to your question, I wouldn't want us to focus on NAP as a measure of sales efficacy. I would really ask you to look at a basket of things such as first-year premiums, such as total collected premiums, such as policy in force, all of which showed growth in the past quarter.
Perfect. Thanks. Then just one thing to clarify, Erik, I think you had mentioned or confirmed that sort of free cash flow expectations are typically around $75 million a quarter or $300 million for the year. I guess, as we think for next year on top of that, am I reading it right that you could have potentially some benefit from release of capital from the recaptured LTC block?
Hey, Erik. Yes, that's correct. It's difficult to estimate, as I mentioned in my prepared remarks. That would be the expectation that as we trade out of these lower-rated securities, there would be some release of capital. We did just back of the envelope, if you think about the amount of assets that are lower rated, and these would be like NAIC 6 and equities. That's probably about 30%-35% of the $500 million or so that was recaptured. If you trade out those securities over time, not that you're not going to have some lower-rated securities, which we actually like, you're probably looking at something like $50 million-$75 million of capital that would be released, again, over a period of time. Difficult to say how long, but some period of time.
Great. Thank you.
Your next question is from Tom Gallagher.
Good morning. The first question is just on the tax benefit. I just want to make sure I understood that correctly. Of the $120 million-$70 million that you're going to recognize, I guess, both this quarter and next quarter, how much was in this quarter and how much is coming in 4Q?
Hey, Tom, it's Erik. Thanks for the question. Yeah, there's about $70 million that we're realizing on the life side. You can think about $30 million of that being allocated towards offsetting the tax liability on the recapture. The other $40 million is going to offset life income in the third and fourth quarter. Roughly $20 million a quarter.
$20 million a quarter. Erik, the other $50 million is likely to be utilized over, did Gary say a 5-year period?
It's an extended period of time. I think if you look at the slide that we have in the appendix that outlines our NOL, I think the key there is to look at the economic value of the NOL, which increased by about $70 million here with the tax settlement. In essence, the economic value of the additional $50 million is pretty low because it extends so far out.
Understood. Just a question on the recapture. Now that you've gotten the assets back, what percent of the $550 million or so of assets would you expect to look to reposition? That would be my first question. Second question is, what's the yield on that portfolio? When you recaptured it, where do you think that's going to go to after the repositioning would be done?
Tom, this is Erik again. We have started to reposition a portion of the portfolio. Obviously, this would be any cash that we received as well as any Level 1, Level 2 highly liquid securities. We haven't disclosed how much of that, but that process has begun. The remaining repositioning is going to take several quarters if not a couple of years because just by their nature, some of the assets are pretty liquid. This is a process that's already started, but it's going to take a period of time. We've not disclosed what the existing yield was or what it is going to be, so can't really comment on that any further.
I guess my-
Yeah, Tom, just-
Sorry, go ahead, Ed.
Sorry, Tom. Yeah, just wanted to add but to the extent that we did revalue the liabilities to our current interest rate assumptions, we had reason to believe that we could achieve the current interest rate assumptions with the assets repositioned.
Ed, that was exactly where I was going with that. You've already contemplated strengthening reserves based on where you would expect that portfolio to settle out from a yield standpoint.
Yes.
Is that a fair way to characterize it?
Yes. With the caveat that we haven't worked our way through the whole portfolio yet, but that was our reasonable best estimate at the time we recaptured.
Okay. Gary, just finally, so the point you were making on the worst-case RBC impact being 10 points was more the way you were thinking about writing down the remaining portfolio to zero. That would be the Level 3 that's under further due diligence affiliated with Beechwood and Platinum. You're writing that down to zero, and it would only be a 10-point impact. Is that the right way to think about it?
Hey, Tom. Yeah, this is Erik, actually. Let me just clarify the comments that I made. First and foremost, recognize that that was just a scenario, and we're not anticipating that we need to write down any of the assets any further. Second, specifically what I said was that if we were to write down the remaining $60 million or so of the assets that were the initial scope of the audit, that would result in less than a 10-point decline in consolidated RBC. I just want to clarify the initial, the 60 versus the entire portfolio.
Got it. Because I think there was an additional over $100 million when you broaden the scope. You weren't assuming writing that down to zero-
No
Again, in this scenario.
No. Yeah. If you recall, the portion of the assets that were the initial scope of the audit we impaired those by $50 million, and that resulted in a remaining value of about $60 million.
Right.
my scenario was just to say, if we wrote that $60 million all the way down to zero, it would have less than a 10-point impact on our RBC.
Got it. Okay. Thanks, guys.
Your next question is from Yaron Kinar.
Yaron, are you there?
Oh, yes. I'm sorry. I didn't realize that was my name. I had a couple of questions. First, just want to confirm that post the recapture, you're in full possession and control of the assets that were part of the Beechwood Re transaction.
Yes, Yaron, that's correct.
Okay. Maybe to follow up on Tom's question about yields. While you haven't disclosed those, is there any reason to assume that the yield after you reposition the portfolio wouldn't be roughly in line with the other long-term care assets that you hold?
Yeah, I think that's generally right. Probably a little bit lower, given it's a little bit of an older block.
Okay. You talked about the RBC impact from potential or should the remaining assets, if it were under the initial scope of the audit, be written down completely. What would happen or what would the RBC impact be if all assets that are currently under the audit review be written down? Just again, just to get some sensitivity, not that I necessarily expect that to happen.
Yeah, we didn't run those numbers, Yaron. All we provided is the sensitivity that I obviously discussed in my prepared remarks.
Okay, fair enough. Maybe one question away from the long-term care block. In terms of Bankers Life recruits, you say recruiting activity is up 15% year-over-year. Yet, if I look at first-year recruits, they're still down quite significantly, both year-over-year and sequentially. When does that turn, or when do we see the inflection point on that front?
Good. Hi, Yaron, this is Gary. We were pleased with the increase in the Bankers Life recruits. We're also pleased in the movement we saw in the first-year collected premium. What we did not anticipate, and we were not pleased with, was the retention of the first-year agents. What causes an agent to leave within that first year, by definition, is going to vary for each agent. If there's one thread that's generally most common, it's the amount of income they're able to produce in that first year, and that's usually directly correlated to the quantity and quality of leads they're able to have for those first-year sales. That is what we're focused on getting right here for the next couple of quarters.
I would not want to give you a time certain in terms of when we'll get that rectified by, but I would be very comfortable in saying we're focused on it, and we'll get it sorted out.
Great. I appreciate the color.
I will now turn the call back over to our host for closing remarks.
Thank you, operator, and thank you everyone for your interest in CNO. That concludes the call.